The President’s Health Plan Won’t Cut the Budget Deficit

One of the central arguments President Barack Obama has made on behalf of the health care plan he wants Congress to approve in coming weeks is that it would begin to address the problem of rising costs and thus also begin to bring down future federal budget deficits.

But will it?

The president’s plan has not yet been assessed by the Congressional Budget Office. But CBO has provided a cost estimate for the Senate-passed bill, upon which the president’s proposal is built. That estimate shows the Senate bill would reduce the budget deficit by $132 billion through 2019. CBO also says that the Senate bill would likely reduce projected deficits even more during the second decade of implementation.

But, as Republican Rep. Paul Ryan of Wisconsin noted at last week’s Blair House meeting, there are a number of reasons to be skeptical about this claim.

For starters, the Senate bill omits the president’s proposal to permanently restore a 21 percent reduction in Medicare’s fees for physician services, now in effect as of March 1. The administration estimates that overriding this cut will cost $371 billion through 2020. Last summer, the House planned to include a permanent repeal of the cut in its health reform bill. But when the president imposed a 10-year budget of $900 billion on the reform legislation, Democratic leaders decided to pull the physician fee spending out of it and pass it separately.

The health bill includes scores of Medicare provisions, touching on just about every aspect of the program. The only major Medicare provision not in the bill is the costly “doc fix.” And the only reason for the omission is to make the total cost of the health reform bill appear lower. But passing the “doc fix” in a separate bill doesn’t make the cost go away. When the president’s entire health care agenda, including the “doc fix,” is tallied up, there is no deficit reduction over the next 10 years.

Ryan noted in his remarks at Blair House that the Senate bill would start up a new long-term care insurance program for the disabled. Participants would be required to pay in premiums for a number of years before becoming eligible for any benefits. Consequently, in the new program’s early years, there would a surplus, which CBO estimates at $73 billion over 10 years. The president’s claim of deficit reduction depends on double-counting these funds, first as an offset for the larger health care bill and then as a revenue source for long-term care insurance benefits beyond the 10-year window of the CBO estimate.

Over the long run, what matters in terms of the budget in the president’s health plan are the entitlement expansions, the effectiveness of “bending-the-cost-curve” measures, and the tax increases and spending cuts used to pay for broadened insurance coverage.

CBO expects the cost of the new entitlement spending aimed at coverage expansion in the Senate bill  the premium subsidies in the exchanges and the expansion of Medicaid — to reach about $200 billion by 2019 and then grow at a rate of 8 percent every year thereafter. In other words, this new health entitlement spending is expected to escalate just as rapidly as Medicare and Medicaid have in the past. CBO does not expect the “delivery system reforms” in the Senate bill, which are mainly small initiatives and pilot programs, to amount to much of anything in terms of cost control.

So how would the president pay for another expensive and rapidly growing entitlement? First, he would try to slow the rate of growth in the Medicare program, but not with new measures to weed out wasteful spending. His claim of long-term deficit reduction comes mainly from across-the-board payment rate reductions for hospitals, nursing homes and other providers of Medicare services. They would get a lower inflation update every year, in perpetuity. But these kinds of cuts do nothing to improve the efficiency of patient care or reward quality.

The chief actuary of the Medicare program has said repeatedly that these cuts are unrealistic because they would continuously cut reimbursements without touching the actual costs of providing care. He expects many facilities would be driven into serious financial distress. And without these Medicare cuts, the Senate bill is almost certainly a long-term budget buster.

The Senate bill also includes the so-called “Cadillac tax,” a new fee imposed on insurers and employers offering high-cost plans. As passed, this provision would generate substantial revenue in the second decade of implementation because the threshold for what constitutes “high cost” would rise much more slowly than medical inflation. Eventually, virtually the entire country would be in plans deemed “high cost.”

The president is relying heavily on the large, second-decade revenue increase associated with this tax for his claim of long-term deficit reduction. But just last week, under heavy pressure from union leaders, the president proposed to delay the tax from 2014 to 2018, well past the point when he will have left office. It will now raise almost nothing over the next 10 years, but the administration still claims credit for the sizeable revenue that would come in a second decade. That revenue would materialize, however, only if future officeholders were more willing than their counterparts today to impose large new taxes on a broad cross-section of the American middle class.

The federal government is piling up new debt at rates not seen since World War II. As Warren Buffett said recently, what the country desperately needs is a serious plan to slow the pace of rising health care costs.

What the president’s plan would deliver, however, is dead-certain entitlement spending, financed with speculative revenue and spending cuts that almost certainly will not work as advertised. The president says Congress should pass his plan to improve the budget outlook. In fact, Congress should reject it to protect the budget from more unfunded entitlement obligations.

James C. Capretta is a Fellow at the Ethics and Public Policy Center. He served as an associate director at the White House Office of Management and Budget from 2001 to 2004.

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